The last decade was remarkable for the Canadian housing market as it climbed higher and higher. Toward the end of 2019, there was much speculation about a housing bubble that could witness an imminent burst. With COVID-19 hitting the country’s economy hard, it shouldn’t be too much of a leap to believe that the housing market crash is likely to occur in 2020.
The data on the ground, however, presents a fairly confusing picture for real estate investors worried about a crash right now. The Real Estate Board of Greater Vancouver reported that the real estate prices in the city increased by 2.5% in value during April 2020. At the same time, the board’s report exhibited a decline in sales. The prices remained the same.
Toronto has similar reports. The housing market in Toronto is slowing down in terms of sales, but the property value remains the same. Some could argue these factors indicate that a housing market crash might not occur. The question is: Will the housing market stay afloat, or is this just the ominous silence before things get bad?
Economists weigh in
Prominent economists weigh in on the situation regarding the future of Canada’s housing market since the COVID-19 pandemic triggered lockdowns. Katherine Judge and Benjamin Tal from the Canadian Imperial Bank of Commerce said that there would likely be “downward pressure on prices” due to deteriorating fundamentals.
Moody’s Analytics is predicting a 30% decline in real estate value this year. However, Rishi Sondhi from the Toronto-Dominion Bank is predicting an 8% hike in property prices in Toronto. Even the experts are not on the same page about housing market price predictions.
One thing the experts agree on is a slowdown in sales volume during this year. There is, however, no consensus about whether the reduced sales will impact property prices. Regardless of how the situation pans out, Real Estate Investment Trusts (REITs) are likely to suffer amid the confusion.
Trouble for REITs
REITs can face serious issues this year whether or not the housing market crumbles. While the price of properties plays a crucial role in the performance of REITs, it is not their source of income. REITs rely on income through rent, which is under significant pressure due to the pandemic right now. With millions of Canadians losing their jobs daily, people will not be able to pay their rent.
It is not just the residential REITs that find themselves in a sticky situation. Commercial leases are at risk of defaulting due to the COVID-19 lockdown. Citing a lack of cash flow, the management for U.S.-based Cheesecake Factory announced that it would not pay its landlords the April rent.
REITs with exposure to both commercial and residential properties can be in plenty of trouble due to a situation like this. RioCan Real Estate Investment Trust (TSX:REI.UN), for instance, is a REIT that can worry its shareholders.
RioCan’s portfolio consists of both residential and commercial real estate. Both of these real estate sectors are suffering right now. Retail stores are under pressure due to businesses closing down to practice social distancing. Residential spaces are suffering due to the inability of tenants to make good on their rents.
RioCan released its quarterly earnings press release on May 7. It discussed the effects of the pandemic, although it was fairly vague about referring to the situation. RioCan did provide that it suspended its same-property NOI. It means the company does not anticipate that it will achieve its previous performance objectives.
It is hardly surprising given how challenging the economic environment is right now. The company did, however, manage to grow its funds from operations in the first quarter of fiscal 2020.
At writing, RioCan is trading for $14.71 per share and is down by almost 44% from its share price at the start of the year. At the current price, it is paying shareholders a substantial 9.71% dividend yield. While it remains to be seen how the delinquencies will affect the company, the short-term future of RioCan is bright.
Reconsidering your position in the stock regardless of a housing market crash this year could be a wise move.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Adam Othman has no position in any of the stocks mentioned.